Error message

Warning: implode(): Invalid arguments passed in envestnetpmc_mod_views_pre_view() (line 65 of /mnt/www/html/envestnetpmc/docroot/sites/all/modules/custom/envestnetpmc_mod/envestnetpmc_mod.module).

Commentaries

PMC Weekly Review - June 12, 2015

A Macro View – Global Bond Sell-Off: Volatility or Global Adjustment?

The sharp rise in global 10- and 30-year yields over the past two weeks has stunned the markets. In the first eight trading days of June, the Treasury yield curve has shifted 15-40 basis points higher: 10-year Treasury yields rose 38 basis points, and 30-year yields increased 34 basis points. Nor have rising rates been confined to the U.S. German 10-year yields more than doubled, from 0.48% to 1.06%. In the U.K, they jumped from 1.81% to 2.19%; in Italy they soared from 1.88 to 2.41; and in Spain, they spiked from 1.84% to 2.38%. Is this sell-off in global government bonds just more volatility as the market participants try to find any sort of value or yield in a market glutted with liquidity? Or, rather, does it reflect an adjustment by those same participants who are anticipating the backing away from several years of massive quantitative easing (QE) and toward eventual normalization of global monetary policy?

June’s sharp movement in yields is essentially in line with the volatility we have seen in both directions so far this year. German yields fell from 0.54% at the beginning of the year to 0.05% (a 90% drop) before climbing back. Italy had a similar story: yields were cut in half (from nearly 2.00% to just over 1.00%) before ending May at levels near where they were at the beginning of the year. Spain hasn’t experienced quite as much volatility: yields fell from 1.61% at the beginning of the year to 1.05% before moving back up. Yields in the U.K had a much more volatile five months. They began the year at 1.76%, moved down to 1.33% in February, and rose to nearly 2.00% in early March. By mid-April, they fell back to roughly 1.60%, before settling at 1.83%, near their break-even level, at the end of May.

From a fundamental perspective, several months of stronger-than-expected economic data from the Eurozone, including Gross Domestic Product (GDP) growth and modest increases in inflation, may have investors on edge as to whether the European Central Bank (ECB) will cut its QE program in the near future. After all, the negative nominal yields on short and intermediate government bonds that became common in March and April only make sense if there is a large forced buyer (ECB) and a relatively limited supply. In addition, the ECB may be putting pressure on European banks to increase cash reserves, which also would contribute to the sell-off. At the same time, weak to tepid economic numbers out of the U.S. have, most likely, pushed the first Fed rate hike to September, at the earliest. This perception has led to the dollar giving back some of its gains against the Euro, and retracing virtually all of its gains against the pound. If this trend continues, treasuries will be less attractive to global buyers, and the expected demand on the longer end of the curve will be reduced. Although signs of actual inflation above the Fed’s stated 2% target remain scarce, the combination of continuing solid job growth data and slowly increasing wage growth are key long-term components in the timing of its rate hike decision.

As it usually does, the answer to the question of what is triggering the sell-off in 10-year Sovereigns sell-off most likely borrows a little bit from both camps. As has been the case since the beginning of the year, the consensus among the institutional managers we talk to is for continued high levels of volatility in the fixed income markets through at least the end of this year. Many investors who were burned (or at least singed) in the sharp rate rise at the end of 2013 are likely to remain highly cautious, and will be quick to sell at the first sign of rising rates. This will create a negative feedback loop, as their collective sales will contribute to falling prices and rising rates. Staying invested with managers who have a focused, long-term outlook most likely will have served investors best once the dust eventually settles. 1

Download the full PDF

1 All yield and other market data from SIX Financial Information via Marketwatch.com

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.

Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.

Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

© 2015 Envestnet. All rights reserved.